The Reserve Bank of India released its “Report On Currency and Finance 2022-23 :Towards A Greener Cleaner India” earlier this month. The report is one of the most comprehensive attempts by the central regulator to discuss the responsibility of the banking and finance sector to the plethora of challenges posed by the climate emergency. It comes close on the heels of several research and policy initiatives undertaken by the central regulator in order to assess and expand the banking sector’s capacity to respond to climate change engendered financial risks.
Last year the survey conducted by the RBI regarding ‘Climate Risk and Sustainable Finance’ highlighted the significant challenges that Indian commercial banks faced in making their lending practices contribute effectively to the global efforts in addressing the climate crisis.
The survey revealed that very few banks included environmental, social, and governance (ESG) criteria as part of the evaluation process for Rtheir top management. Additionally, most banks lacked a dedicated department or division within their organizational structure to focus on ESG initiatives and sustainable finance. Furthermore, they failed to present a clear strategy for expanding their sustainable finance portfolio or effectively responding to climate risk.
Earlier this year, the RBI had announced its intention to release guidelines on ‘Climate Risk and Sustainable Finance’ in a gradual manner. One of the components of these guidelines is the framework pertaining to green deposits, which was released last month.
The report on currency and finance is even more comprehensive in outlining the contours towards a climate policy for the banking sector. Nonetheless, it boils down to three areas where the central regulator sees a role for itself. These are as follows:
- mandatory disclosure requirements pertaining to climate related risks of banks
- mandating financial institutions to incorporate environment risk factors in their risk management process;
- green asset ratio (GAR), i.e., the proportion of total assets invested in sustainable projects or economic activities – prescribing financial institutions to maintain a minimum threshold level.
Too little, too slow
The report spends close to 100 pages on surveying the international developments on climate mitigation strategies and risk assessment, but ends up repeating the same old thinking on green financing, climate related disclosures etc. This is a huge letdown for several reasons.
First, banks need to stop funding or gradually withdraw finance from environmentally harmful projects. They need to put existing funding in brown projects under greater scrutiny, hear and act upon voices from the communities. Green investments are not enough. Emission calculations for existing and prospective brown projects need to be undertaken and funding made conditional upon standard thresholds. So called green projects too need to be periodically assessed for social and environmental impacts.
Second, it is glaring that social impacts – such as loss of livelihood, lifeworld, habitat and culture – of development projects get zero attention in the numerous briefs and papers published by the RBI over the years. No doubt, many social impacts are connected to climate change but they call for a separate vertical. Environmental impacts too are not limited to climate change and require a broadening of policy concerns.
Third, the emphasis remains on ‘financial risk’ to banks owing to climate change, rather than the ‘impact risk’ posed by projects financed by banks on climate, environment and social life.
Moreover, what is conspicuous by its absence is a discussion of strategies implemented internationally by the banking sector. Almost all multilateral development banks as well as several foreign banks have implemented standards of investment and social-environmental safeguard mechanisms to respond to environmental, social and climate related impacts of their investments. These safeguard mechanisms often involve mandatory disclosure of project details – financial, environmental and social assessments reports, assessment mechanisms of environmental-social impact before investment, a grievance redressal mechanism at the level of the bank itself. This is not to say that such mechanisms in international institutions are sufficient or well implemented. But how come a report which discusses multilateral agreements from the Paris agreement to Network for Greening the Financial System, to carbon markets and carbon tax, does not make a single reference to mechanisms which are already in place in the international banking sector?
The report provides us a glimpse into the thinking going on at the central regulator in response to global concerns on climate emergency. Beyond a policy framework for what it calls ‘green’ financial segments, very little seems to be on offer. This bodes ill for the Indian banking and finance sector which is surely lagging behind global developments.
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